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7 April, 19:19

Swagelok Enterprises is a manufacturer of miniature fittings and valves. Over a 5-year period, the costs associated with one product line were as follows: first cost of $20,000, and annual costs of $16,000. Annual revenue was $29,000 and the used equipment was salvaged for $10,000. What rate of return did the company make on this product?

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  1. 7 April, 22:55
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    The rate of return did the company make on this product is 61.93%

    Explanation:

    initial cost = 20000

    Annual benefit = 29000

    Annual cost = 16000

    Salvage value = 10000

    t = 5yrs

    Let rate of return is I, then at rate of return NPV=0

    Present value = - 20000 + (29000 - 16000) * (P/A, i, 5) + 10000 (P/F, i, 5)

    -20000 + 13000 * (P/A, i, 5) + 10000 (P/F, i, 5) = 0

    13 * (P/A, i, 5) + 10 * (P/F, i, 5) = 20

    We need to use trail and error method to find rate of return

    At = 10%, value of expression 13 * (P/A, i, 5) + 10 * (P/F, i, 5) is 55.49

    At = 15%, value of expression 13 * (P/A, i, 5) + 10 * (P/F, i, 5) is 48.55

    At = 25%, value of expression 13 * (P/A, i, 5) + 10 * (P/F, i, 5) is 38.24

    At = 35%, value of expression 13 * (P/A, i, 5) + 10 * (P/F, i, 5) is 31.09

    At = 45%, value of expression 13 * (P/A, i, 5) + 10 * (P/F, i, 5) is 25.94

    At = 55%, value of expression 13 * (P/A, i, 5) + 10 * (P/F, i, 5) is 22.11

    At = 60%, value of expression 13 * (P/A, i, 5) + 10 * (P/F, i, 5) is 20.55

    At = 62%, value of expression 13 * (P/A, i, 5) + 10 * (P/F, i, 5) is 19.98

    using interpolation

    rate of return = 0.6 + (20.55-20) / (20.55-19.98) * (0.62-0.6)

    = 0.6+0.019298

    = 0.6193

    = 61.93%

    Therefore, The rate of return did the company make on this product is 61.93%
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